Overseas trust loan

Trusts Discussion
1

I have a uk client who is the sole beneficiary of a trust in Switzerland.

The trust is going to make them an interest free loan. There will be a loan agreement and the loan is repayable.

What are the tax implications?

Is there a taxable benefit on the interest free element?

Adrian Thompson
Adrian Thompson & Co

2

Adrian

Yes the benefit of an interest-free loan from a non-UK trust is a deemed capital payment. Its UK tax treatment will depend on the composition of the trust and whether there are any stockpiled gains, offshore income gains or relevant income in the trust.
Normally the ‘benefit’ calculated using HMRC rates will crystalise, in the hands of a UK resident beneficiary (i.e. be matched against), an equivalent amount of stockpiled gains. If the amount exceeds the beneficiary’s annual exempt amount then he will be subject to UK capital gains tax thereon. If the matched gains are more than a year old there will be a 10% surcharge, although newer gains are matched in priority to older gains (since 2008).
However, if there are any stockpiled offshore income gains or relevant (undistributed) income then these take precedence and the benefit will be treated as income in the hands of the UK beneficiary.
Also the loan will be a UK situs asset of the trust that may bring it within the scope of UK inheritance tax, if it wasn’t already.
This is a fairly complex area and the rules have changed several times over recent years. In the current climate of HMRC paranoia about all things offshore it is worth taking proper specialist advice that fully considers all the relevant circumstances.

Maxine Higgins
Citroen Wells

3

Presumably your client is both UK resident and domiciled?

And the settlor?

Is the trust settlor interested?

Malcolm Finney

4

Thanks for that. Much appreciated.

Adrian Thompson
Adrian Thompson & Co

5

Thanks Malc I have decided to get the trustees to take specialist advice, after passing on the messages on here.

Not being a expert in this area I feel this is the best thing I can do.

Adrian Thompson
Adrian Thompson & Co